Wednesday, February 27, 2013

Capital goods orders, a good proxy for business investment, have come roaring back in recent months after a big slump last summer. January orders were up 12.8% from September levels, and they have risen by a decent 4.7% in the past year. A few months ago, this indicator was casting doubt on the economy's ability to continue growing. Now that is no longer the case.

It's probably the case that last year's slump in orders reflected concerns about the looming "fiscal cliff" and the possibility of a significant rise in taxes and/or economic weakness, and that the recent jump in orders is equivalent to a big sigh of relief on the part of businesses that the issue was resolved satisfactorily.

This is yet another reminder that my thesis for the past four years still holds: with the market braced for a recession or worse, risk assets are going to rise in price as long as the evidence shows that the economy is not tanking. In other words, the equity rally that is almost four years old now has been driven not by optimism, but by a reduction in pessimism. The future has not turned out to be as bad as was expected. With this market, avoiding recession is all that matters.

9 comments:

Some of the weakness last year may have come from the expiration of the depreciation tax break that expired at the end of 2011. A lot of orders were probably brought forward in 2011, which resulted in short-term weakness in much of 2012. Now it's just returning to trend.

you have no real thesis. you just relentless hector all those who prefer not to participate in speculative markets with no true price signal. endless hectoring, haranguing and bragging about your insight.

Looks like bubbles are blowing in the wind. It is only a matter of time before the latest wave of artificial financial paper gains pop like soapy bubbles hastily blown by a 4 year old.

http://mises.org/daily/6371/Addicted-to-Asset-Bubbles

Buy cheap hedges and be patient. We are already in the denial stage. An important lesson to remember; when Government starts to deny the existence of something, that something is usually not far behind. Bernanke is in complete denial because his incetive structure depends on it.

When are you going to realize headline inflation (core or not) doesn't mean inflation is not alive, well, and blowing a bubbles that will eventually pop? We do not need to see a high CPI reading for the unintended consequences of monetary policy to cause significant damage to the real economy.